Understanding the concept of Profit-Oriented Revenue and its role in your profitability narrative is paramount.
NB: This is an article from Demand Calendar
It’s not just about how much revenue each product or service brings in but also how much it costs to deliver these offerings. Comprehending these variable costs can provide a clearer picture of the actual profit associated with each revenue source.
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Decisions should be rooted in assessing different costs tied to various revenue streams. Acknowledging the direct and indirect costs of providing a room, a meal, or other service gives a realistic perspective of the profit margins. It’s not enough to increase sales; we should focus on selling what brings us the most profit.
But these decisions and understanding should not reside only at the top. As a CEO, you must ensure this knowledge is top of mind within your commercial team – from sales and marketing to revenue management. Encourage them to grasp the notion of costs and profitability thoroughly. Incorporate these concepts into their routine performance metrics, creating a unified, profit-centric mindset across the hotel.
Finally, remember to assess these costs regularly and adjust your strategies accordingly. The market dynamics are ever-evolving, and so should your approach to profitability. As a CEO, this shift from revenue maximization to profitability optimization is the key to long-term success.
As a CEO, your first action is to construct a robust profitability framework:
- Shift the traditional P&L model to a Profit-Oriented Revenue Management (PORM) model. Your P&L should show Total Revenue – Customer Acquisition Cost (CAC) = Contribution – Cost Of Goods Sold (COGS) = Gross Profit.
- Train your team to understand and use this model. This step is critical for the model to become a valuable tool in your operation. Setting incentives on profit levels instead of total revenue will make people adopt profit-oriented thinking faster.
- Regularly review the P&L statements with your team, focusing on profitability levels and their implications.
Understanding the Current CAC and COGS
The next step is to dig deeper into the current CAC and COGS. CAC is a critical metric in the hotel industry. It’s the total cost of acquiring a customer, considering marketing, sales, and other related expenses. Understanding and optimizing the CAC can significantly enhance your hotel’s profitability, especially with a firm grasp of COGS.
Understanding the Relationship between CAC and COGS
There’s an intrinsic link between your CAC and COGS. When you focus on promoting and selling high-profit revenue sources, where COGS is well managed and marginal profit is high, you effectively leverage your CAC for the best possible return. You’re investing in acquiring customers who bring you the most profit, maximizing the return on your acquisition expenses.
Targeting the Right Customer Segments
Segmenting customers based on their preference for your high-profit services helps to optimize CAC. Your marketing and sales efforts become more efficient as they are concentrated on attracting guests who are more likely to opt for these services. This brings down your CAC and boosts profitability by driving up the proportion of high-margin revenue.
The Role of Data Analytics
Leveraging data analytics can help identify which customer segments have the highest affinity for your profitable services and the optimal marketing channels to reach them. This intelligence guides your marketing spend, ensuring the most efficient use of resources and reducing the CAC.
Direct Booking Strategies
Promoting direct bookings is another effective strategy for lowering CAC. It reduces dependency on third-party platforms that charge commission fees. With a clear understanding of your high-profit services, you can create compelling packages and offers to encourage direct bookings.
Balancing Act
Optimizing CAC should not compromise the guest experience or brand image. Maintaining a balance is essential – while focusing on high-profit services, the overall guest experience must remain satisfactory to ensure customer loyalty and repeat business.
